Above all…don’t panic. Usually something can be worked out and most buyers and sellers want to do so. If the terms of the contract cannot be met, then it is subject to further negotiations.
The first option will usually lie with the seller. If the buyer lacks the funds, or is unwilling, to make the extra down payment, the seller can reduce the price to the appraised value and the contract will be in full force and effect.
The second option would rest with the buyer. If the buyer wants the home and has the extra money to add to the down payment, the sale can proceed. Frequently, some compromise between the parties is needed and desirable.
Another option, of course, is to double-check the appraisal. The appraiser may have missed an addition to the home or some other major improvement. If you are the seller, you can try to avoid this by having written information for the appraiser available on such improvements prior to the appraisal visit.
Appraisers are sometimes short on time and/or can make honest mistakes, let’s face it, they are human too. Or, when a market takes a sudden change it may also be possible that they don’t understand the current market thoroughly and run into problems with appropriate comps. Walking through the appraisal specifics with them can possibly uncover some misconceptions in comparisons and assist in getting full appraisal value on your home. Trust in your REALTOR to lead you through this process.
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